(Bloomberg) — U.S. Securities and Exchange Commission member Daniel Gallagher vowed to oppose future settlements over Wall Street misconduct in cases where the agency hasnt clarified whether the firm will face knock-on sanctions from the agreement.
The remarks by Gallagher, a Republican, show a deepening partisan rift among the five-member commission over whether banks should be granted waivers from being automatically disqualified from certain businesses — such as managing mutual funds — when settlements are finalized. Gallagher is scheduled to make the remarks in a speech Friday in Dallas.
The penalty waivers, once a routine and obscure job handled by SEC staff lawyers, have in recent months become a flashpoint at the commission. The extra punishments are tucked into securities laws and were originally crafted to stop egregious frauds, mainly by small-time schemers and boiler-room operators. Because they kick in automatically when a case is resolved, a company needs to get the agency to waive the penalty.
Automatic disqualifications are, in fact, blunt tools that were intended to serve a purpose distinct from enforcement sanctions, Gallagher said in the prepared remarks.
The SECs two Democratic commissioners, Kara Stein and Luis Aguilar, have said the waivers shouldnt be granted to repeat offenders. They disagreed last week with the agencys decision to grant a reprieve to Oppenheimer Holdings Inc., saying the SEC turned a blind eye to the investment banks past bad acts. The waiver allowed the brokerage firm to continue raising capital for hedge funds and private companies after it admitted to improperly selling billions of shares of penny stocks.
The partisan standoff has already delayed some enforcement actions. The arguments between commissioners stalled a settlement last year with Bank of America Corp., which faced the threat of being kicked out of the private fundraising business.
Recent efforts to treat automatic disqualifications as additional sanctions are inconsistent with the intended purpose of these provisions, Gallagher said. This divergence from historical practice has unfairly left individuals and entities potentially subject to disqualifications unable to make rational decisions regarding defense strategy and settlement.
Gallagher said the dispute has grown so disruptive that Congress may have to consider removing the automatic disqualifications from law. Some congressional Democrats have called for legislation that would limit the SECs ability to grant waivers.
